The Internal Revenue Service (IRS) has publicized fresh codes for taxpayers who utilize cryptocurrencies. In 2014, the agency disseminated policies that made it unmistakable that for tax objectives, digital currencies would be dealt with as capital assets as far as they are interchangeable for money.
This current Revenue Ruling comprises recommendation that particularly deals with two topics, but before exploring those questions and their answers, some explanations might be beneficial.
A hard fork in a cryptocurrency may give rise to the development of a fresh cryptocurrency. That means, after a hard fork, two blockchains are created—as well as two cryptocurrencies.
An airdrop is a technique of allocating units of a cryptocurrency to their owners’ distributed ledger addresses. Whenever a hard fork is preceded by an airdrop, part of the fresh currency is allocated to any addresses that contain the source currency from which the hard fork occurred.
This concept implies that the user is taxed on revenue whenever it is addressed. This means that even if the user doesn’t attain this payment, they are still taxed on it.
Airdrop doesn’t precede a hard fork in all cases. This is where the idea of Constructive Receipt enters: whether the user has received an airdrop after a hard fork, that user is presumed to have “constructively accepted” cryptocurrency and this airdrop is documented on the distributed ledger.
The Questions Dealt With
These questions were dealt with in the new Revenue Ruling:
1- When taxpayers attain units of fresh cryptocurrencies after an airdrop that precedes a hard fork, does this mean that the taxpayer now possesses gross income under subsection 61 of the Code?
2- In situations where taxpayers attain no unit of currency after a cryptocurrency hard fork they possess, is the taxpayer said to possess gross income under subsection 61 of the Code?
Based on the revenue verdict, taxpayers don’t get gross income stemming from a hard fork when they don’t receive new cryptocurrency. However, taxpayers are said to have gross income when they attain new cryptocurrencies resulting from an airdrop that preceded a hard fork.
Azeez Mustapha is an experienced author, trader, markets analyst, signals strategist, and funds-manager.